Yoshida in China: SMIC rides on China fabless growth

SMIC's five consecutive quarters of revenue growth paint a picture of a new SMIC.

Five consecutive quarters of revenue growth posted by Semiconductor Manufacturing International Corp. (SMIC) through the first quarter of 2013 paint a picture of a new SMIC, with solid operations carefully managed by CEO T.Y. Chiu. It also tells a story of the rapid growth of China fabless companies over the recent years and how SMIC is finally profiting from that trend.

SMIC announced Tuesday (April 24) what Chiu called “another record-high revenue” of $501.6 million in the first quarter of 2013, growing by 50.8 percent compared with a year ago. The company’s gross margin also improved to 20.4%, compared with 12% in the first quarter of 2012. Income attributable to SMIC was $40.6 million in the first quarter 2013 compared with a loss of $42.8 million in first quarter last year. “Utilization improved to 89 percent, compared to 74.1% last year,” according to Chiu. “Despite normal low seasons of fourth quarter and first quarter, we've achieved five consecutive quarters of revenue growth and four consecutive quarters of net profit.”

Driving SMIC’s revenue today are strong demand for SMIC’s 45-nm and 40-nm process services, the increased number of SMIC’s Chinese customers and the growth of smartphone and tablet productions in China, observed Chiu.

More specifically, Chiu explained that the company’s 45- and 40-nm revenue contribution more than doubled -- to 6.5 percent -- in the first quarter compared to 2.6 percent of wafer revenue in the first quarter of 2012.

Chiu also highlighted revenue from SMIC’s Chinese customers, which grew 14.5 percent sequentially and 79.1 percent annually. Close to 40 percent of the company’s total revenue in the first quarter of 2012 was generated by Chinese customers, according to SMIC -- “an all-time high.”

China's revenue share at SMIC 2007 Q1, 2013

Source: SMIC

Citing market research firm Gartner, Chiu noted that the overall Chinese semiconductor market is forecast to grow 12.1 percent in 2013. In contrast, the worldwide semiconductor continues to grow at 4.5 percent. “Under this backdrop, we see that the recent growth within China and some other regions have been largely driven by the growth of smartphone and tablet demand in China,” said Chiu.

China’s role as a manufacturing hub for smartphones and tablets is also contributing to the growth of China fabless companies. During the analyst call, Chiu, quoting Gartner’s numbers, said that 672 million smartphones are expected to be produced in China in 2013. Gartner estimates that number to rise to 1.3 billion units in 2017.

As for tablets, 187 million units are predicted in China in 2013. By 2017, Gartner forecasts the number to rise to 407 million.

28-nm challengeIt’s important to note, however, that SMIC is not yet ready to offer 28-nm process services to those who need it this year -- such as Spreadtrum Communications, Inc. (Shanghai), one of the biggest customers for SMIC. During an interview with EE Times last month, Spreadtrum CEO Leo Li said that when Spreadtrum moves to a 28-nm node for its SoCs in the fourth quarter of this year, Spreadtrum is going to work with TSMC.

As for its 28nm process technology, SMIC has been working closely with IBM.
But over the years, SMIC has accumulated its own IPs. Earlier this year, SMIC announced that it has been selected as a 2012-2013 constituent of the Ocean Tomo 300 Patent Index.
The Ocean Tomo 300 Patent Index is the first stock index based on the value of corporate intellectual property. The Patent Index is composed of 300 companies chosen for the value of their patent portfolios relative to book value.
As of January 2013, SMIC claims that it held more than 3,000 patents, with 3,800 patent applications pending.